Sources of Funding for Start-ups

Introduction

Mention the richest man in Malaysia, Robert Kuok and images of glory, fame and cash come to mind. He is one of the successful businessmen in Malaysia. Although Malaysia is a small country, it has many business opportunities yet to be explored. If you have great ideas but lack capital and intend to give up on it, do not let your ideas flow away just like that. There are still many alternative ways of raising fund for your start-up.

Business angels

Business angels are also called angel investors, they invest in small start-ups or entrepreneurs. Business angels are normally wealthy individuals who are willing to invest in potential start-ups and help to nurture the spirit of entrepreneurship. They are usually family members, relatives and friends. (Investopedia, 2016)

Some business angels invest in both time and money in your start-up. They may offer support, advice and knowledge which are beneficial for your start-up as many investor angels have vast experience and successful careers in the past. Taking the example of Uber, Steve Jang has invested in numerous companies such as Uber, Hyperloop, Lily Robotics and Postmates. He has invested capital in Uber and is also one of the advisors in the company (AngelList, 2016). Moreover, getting finance from a business angel is an informal financing option. Therefore, the angel investors may have lesser requirements in an agreement between the owners of the business and the investors in contrast to bank loan which usually imposes restrictions on the operation of a business.

Not everyone is lucky enough to have a rich dad or a friend who is willing to invest into your business with their own money*coughTrumpcough*. It may be hard to find a business angel for your start-up as some individuals prefer to stay anonymous. However, there are some platforms in Malaysia for business angels and start-ups to interact with each other, one of them is Capital – one of the leading organisations in Malaysia that provide a platform for investors and entrepreneurs to interact.

Government-backed Scheme

Start-ups are the future dominator of a country’s economy as they provide job opportunities which lead to more employment and indicate improved economy and this is the reason why governments do usually provide grants for start-ups. One of the well-known government-backed schemes in Malaysia is MDEC’s Start-up & Entrepreneurship Ecosystem Development (SEED) team. The Program provides a platform to accelerate high-growth start-ups by linking and immersing them to the global start-up’s ecosystem (MSC Malaysia, 2016).

The government-backed scheme allows new start-ups to have access to capital without losing control over the business. It is comparatively easier to get as other financing options normally have high barriers to provide funds. Other financing options such as bank loan will require a sufficient industry experience which many start-ups will fail this requirement. For instance, a minimum of 3 years in similar business operation to get a bank loan from Hong Leong Bank (Hong Leong Bank, 2016).

Crowdfunding

Other than government-backed scheme, crowdfunding is the means of funding a project by raising fund from a large number of people. Crowdfunding provides an opportunity for investors to invest in a company with only a small amount of money and creates a win-win situation for both investors and investee. How do they do that?

Crowdfunding brings investors and entrepreneurs together by making use of the easy accessibility of vast networks of people through social media and crowdfunding websites (Investopedia, 2016). With the vast networks of people in the social media, funds can be gathered into the amount required by the start-up companies through crowdfunding and the investors can mitigate their risks by diversifying their investment into different areas.

Crowdfunding provides unlimited opportunities for start-ups to raise money and for investors to explore high potential investment opportunities so that they can earn capital gain or dividend gain in future if this is an equity-based crowdfunding. Financing start-up in Malaysia with funding from crowdfunding can be done with a number of crowdfunding platforms in Malaysia, typically via the internet. The 3 top crowdfunding platforms in Malaysia are Alix Global, Ata Plus, Crowdonomic and Eureeca (DealStreetAsia, 2016).

Venture Capital

Venture Capital is also a source of finance classified as risk capital. Providers usually ask for an equity stake in the company as a return.

Venture Capital is one of the favourite ways for companies to raise capital. This is because it can raise a larger sum of capital compared to bank loan which usually comes with high-interest rates and tends to secure on assets in the company. However, the start-ups might give up making some key decisions on how should the company be operated as there are more equity stakeholders in the company because these equity shareholders also have a right-on voting in a company’s meeting.

The first step is to submit a business plan to investors or venture capital companies. The investors will then perform a due diligence to the business plan if they are interested in investing. Due diligence is a process of buyers or investors obtaining information about the business from business and legal purposes (The Venture Alley, 2016). Then, the investors will invest in the company with the equity stake in the company as a return.

Venture capitalists may be like business angels but in fact, they are not. Business angels are more focused on helping with the start-ups, but venture capitalists only aim to get as much profit as possible from their investment.

Conclusion

There are certainly more ways of raising fund for your start-ups especially when technologies are improving as it enables easier access for the start-ups to the capital market. However, there are many drawbacks as start-ups are getting competitive in the markets. Therefore, choosing the optimum financing options for your start-up is a crucial step to minimise the risk of failure.